Two essays on monetary policy under the Taylor rule

by Suh, Jeong Eui

Abstract (Summary)

In this dissertation, two questions concerning monetary policy under the Taylor rule have been addressed. The ?rst question is on, under the Taylor rule, whether a central bank should be responsible for both bank supervision and monetary policy or whether the two tasks should be exercised by separate institutions. This is the main focus of Chapter I. The second question is on whether the Taylor rule plays an important role in explaining modern business cycles in the United States. The second question has been covered by Chapter II.
The implications of the ?rst chapter can be summarized as follows: (i) it is inevitable for the central bank to have a systematic error in conducting monetary policy when the central bank does not have a bank supervisory role; (ii) without a bank supervisory role, the e?ectiveness of monetary policy cannot be guaranteed; (iii) because of the existence of con?ict of interests, giving a bank supervisory role to the central bank does not guarantee the e?ectiveness of monetary policy, either; (iv) the way of setting up another government agency, bank regulator, and making the central bank and the regulator cooperate each other does not guarantee the e?ectiveness of monetary policy because, in this way, the systematic error in conducting monetary policy cannot be eliminated; (v) in the view of social welfare, not in the view of the e?ectiveness of monetary policy, it is better for the central bank to keep the whole responsibility or at least a partial responsibility on bank supervision.
In the second chapter, we examined the e?ect of a technology shock and a money shock in the context of an RBC model incorporating the Taylor rule as the Fed??s monetary policy. One thing signi?cantly di?erent from other researches on this topic is the way the Taylor rule is introduced in the model. In this chapter, the Taylor rule is introduced by considering the relationship among the Fisher equation, Euler equation and the Taylor rule explicitly in the dynamic system of the relevant RBC model. With this approach, it has been shown that, even in a ?exible-price environment, the two major failures in RBC models with money can be resolved. Under the Taylor rule, the correlation between output and in?ation appears to be positive and the response of our model economy to a shock is persistent. Furthermore, the possibility of an existing liquidity e?ect is found. These results imply that the Taylor rule does play a key role in explaining business cycles in the United States.